-- In an eagerly awaited quarterly profit update two months after JPMorgan Chase blindsided investors with news of a multi-billion-dollar trading loss, the nation's largest bank posted better-than-expected earnings but said the loss has ballooned from $2 billion to $5.8 billion.
In addition to a $4.4 billion second-quarter loss from the botched trades, the bank said it had to restate first-quarter earnings by $459 million in additional losses, bringing the total lost so far on those transactions to about $5.8 billion.
And for the first time, the bank announced that it is forcing executives and traders responsible for the massive loss to give back substantial chunks of their pay from bonuses and stock grants, a punishment known as "clawbacks." Clawback provisions were introduced in 2002 in the Sarbanes-Oxley Act following the accounting scandal at energy-trading firm Enron.
The bank clawed back the maximum permitted, said Michael Cavanagh, a long-time Dimon lieutenant brought in to clean up the mess.
While the bank would not identify employees who were forced to give back pay, the clawback amounted to two years of compensation from stock and options, Cavanagh said.
Dimon, however, in lauding the service of Ina Drew, who headed the CIO office at the time of the loss before stepping down this spring, did say that Drew stepped forward to give up the maximum clawback she faced. Drew earned more than $15 million in 2011. Dimon said Drew "acted with integrity."
Analysts say this is the first step toward JPMorgan JPM putting the trading controversy behind it and getting back to the business of banking. But they warned that the earnings restatement creates fresh uncertainty about the firm's risk controls.
"The trading loss was right in line with what we expected,"says Marty Mosby, an analyst that follows JPMorgan for Guggenheim Securities. "And the actual report on earnings was much stronger than we expected. What we didn't expect was the restatement. It raises furthur uncertainty and could lead to reviews from the Securites and Exchange Commisison" and other regulators.
Despite the massive loss caused by a poorly executed trade using complex financial instruments called derivatives, the bank was able to post second-quarter results that topped analyst expectations.
The bank reported earnings of $1.21 per share, well above the 70 cents analysts had expected. Revenue came in at $22.9 billion, which was more than $1 billion above estimates.
Second-quarter 2012 net income was $5 billion, compared with net income of $5.4 billion in the second quarter of 2011. Earnings per share were $1.21, compared with $1.27 in the second quarter of 2011.
Jamie Dimon, chairman and chief executive officer, commented on financial results: "Importantly, all of our client-driven businesses had solid performance. However, there were several significant items that affected the quarter's results - some positively; some negatively. These included $4.4 billion of losses on CIO's synthetic credit portfolio, $1 billion of securities gains in CIO…"
Dimon said, "The Firm also reduced loan loss reserves by $2.1 billion, mostly for the mortgage and credit card portfolios. These reductions in reserves are based on the same methodologies we have used in the past - the good news is that these reductions reflected meaningful improvements in delinquencies and estimated losses in these portfolios. We continue to maintain strong reserves."
The bank announced that it is restating its first-quarter earnings, reducing profit by $459 million, due to lower valuations related to the "synthetic credit portfolio" run by the unit involved in the botched trade.
In a regulatory filing, the bank said it determined that how the value of the portfolio was calculated, known as marks, were inaccurate and was lower than reported. The firm's review "raises questions about the integrity of the trader marks and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses in the portfolio during the first quarter," the bank said in a filing.
The fact that the trading loss, which occured in a bank unit known as the Chief Investment Office or CIO, was in the middle of the $2 billion to $9 billion range analysts were expecting, was viewed as a positive by Wall Street analysts.
The huge trading loss, which has spawned investigations by government regulators and forced Dimon to answer to lawmakers in two separate congressional hearings last month, has tarnished Dimon's once impeccable reputation as a leading Wall Street risk manager and damaged investor confidence in one of the few big banks to navigate its way through the financial crisis without major harm.
The controversial loss has also resulted in big losses for shareholders. JPMorgan shares have tumbled 16.4% since May 10 when it divulged the trade-gone-bad. Shares closed Thursday at $34.04, down sharply from $40.74 before the trading mishap. In contrast, the broad U.S. stock market has declined just 1.9% in the same period. In all, JPMorgan has seen its market value decline by more than $25 billion since the trading scandal unfolded.
Dimon and other top bank executives, including chief financial officer Doug Braunstein will attempt to put the trading crisis behind them by providing furthur details about the financial fallout from the bad trade in a two-hour conference call with analysts and investors that begins at 7:30 a.m.
The trading debacle has come at a difficult time for banks and other U.S. companies. The U.S. economy has been exhibiting fresh signs of an economic slowdown, due in large part to huge uncertainty surrounding Europe's debt crisis and slowing growth in China, which has been the world's economic locomotive for years.